Chinese joint stock banks turn sour, economic outlook grim

All five banks saw single-digit contractions in operating income.

China’s lukewarm economic outlook has given Chinese joint-stock banks (JSBs) an expected underperformance, expressed CreditSights.

Other factors that will be affected are banks' challenging profit growth prospects, and subdued bond trading compared to other Asian regions.

Banks monitored by CreditSights are five Chinese JSBs: China Merchants Bank (CHINAM) China CITIC Bank (CINDBK), China Everbright Bank (CHEVBK), Shanghai Pudong Development Bank (SHANPU), and Industrial Bank (INDUBK).

In 1H23, all five banks saw single-digit declines in operating income, but net profits increased year-on-year (YoY) for CHINAM, CINDBK, and CHEVBK due to lower provisions.

However, SHANPU and INDUBK experienced YoY net profit decreases.

Net interest margins (NIMs) contracted by 20-30 bp YoY, with a smaller decline at CINDBK (-14 bp YoY).

Mid-to-high single-digit YoY loan growth offset the smaller NIM decline for CINDBK, resulting in flat to slightly lower net interest income in 1H23 (SHANPU had a larger decline due to softer loan growth).

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In 1H23, the JSBs faced more significant challenges in fee income compared to the Big 5 banks, with fee income down 9-30% YoY, except for CINDBK (up 1.2% YoY).

They rely more on wealth management income, which has been slow to recover, and have weaker competitiveness in settlement and IB businesses.

Provisions generally declined in 1H23, cushioning the bottom line, except for SHANPU, which increased provisions. Credit costs fell by approximately 25-45 bp YoY at non-SHANPU JSBs.

Loan growth was modest, up 4-5% YTD for most banks (except SHANPU at 1.6% YTD), with a slowdown in Q2 (flat to up to 1.6% QoQ). Loan-deposit ratios generally improved, except for INDUBK, which still had a ratio above 100%.

Asset quality remained stable in 1H23, with flat to lower NPL ratios, special mention loan ratios, and overdue ratios, except for CHEVBK. NPL coverage ratios were stable to higher QoQ.

The capital positions of the JSBs were generally stable QoQ, attributable to measured loan growth. However, INDUBK was down an estimated 40 bp QoQ.

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